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Southwest (LUV) Q3 Profitability View Dim on Delta Variant Woes

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Amid fresh fears of the Delta variant of coronavirus, Southwest Airlines (LUV - Free Report) gave a heads-up that unlike its previous expectation, it might not be profitable in the third quarter of 2021.

In a SEC filing dated Aug 11, the airline stated that it has “experienced a deceleration in close-in bookings and an increase in close-in trip cancellations” this month, apparently due to rise in coronavirus cases induced by the Delta variant. The company, carrying a Zacks Rank #3 (Hold), expects the impact to continue into September as COVID-19 cases presumably remain at an elevated level. Based on this assumption, the carrier has reduced its third-quarter 2021 operating revenue guidance by three to four points from the previous outlook. It estimates operating revenues to decline 15-20% in the third quarter from the comparable period in 2019. As the Delta variant dampens uptick in air-travel demand, other U.S. carriers like American Airlines (AAL - Free Report) , United Airlines (UAL - Free Report) and Delta Air Lines (DAL - Free Report) might soon slash their forecasts as well. Each of the stocks carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Per the SEC filing, Southwest’s July operating revenues benefited from strong leisure passenger traffic and fares, which were higher than July 2019 levels. Operating revenues declined approximately 12% in July from the 2019 level. The same is estimated to fall 15-20% in August from the 2019 level compared with the previous guidance of a decrease of 12-17%. Operating revenues are expected to decrease further by 15-25% in September. Due to this anticipated negative impact on revenues in August and September, the company is in doubts about whether it could be profitable in third-quarter 2021 without taking into account benefits from payroll support program proceeds.

In July, Southwest’s managed business revenues dropped approximately 63% from the comparable period in 2019. Capacity, measured in available seat miles, which was down 3% from the 2019 level in July, is expected to be up 3% in August.
The Dallas, TX-based carrier continues to expect unit costs, excluding fuel and oil expenses, special items, and profit sharing, to increase 1-5% in the third quarter from the comparable period in 2019. Economic fuel costs are still estimated in the range of $2.05-$2.15 per gallon for the third quarter.